OREANDA-NEWS. Fitch Ratings has revised Indonesia-based homebuilder PT Alam Sutera Realty Tbk's (ASRI) Outlook to Negative from Stable. At the same time the agency has affirmed the company's Long-Term Issuer Default Rating (LT IDR) at 'B+'. A full list of rating actions is provided at the end of this commentary.

The Negative Outlook reflects increased uncertainty about ASRI's ability to improve its presales in 2016, and the resultant strain on its cash collections, given the slow domestic macroeconomic environment. There is also a risk that presales could be constrained by buyers exercising caution on asset purchases due to the government's clampdown on tax evasion. We also believe the company could face some residual challenges in re-launching its residential units at its Pasar Kemis township. The higher proportion of commercial property sales in ASRI's presales mix also increases uncertainty that ASRI will meet its 2016 presales targets, given buyers in this segment typically delay purchases during economic downturns.

KEY RATING DRIVERS

Weak Presales in 2015: ASRI sold about IDR1.5tn of property in the nine months to 30 September 2015 (9M15), which is just 32% of its annual target of IDR4.5tn. This shortfall is one of worst across the Indonesian homebuilders that Fitch rates. Consequently ASRI's sales efficiency, measured by the ratio of presales / gross debt weakened to 0.33x based on annualised 9M15 sales, compared with 0.7x in 2014, and 1.1x in 2013. However if the company achieves its revised sales target of IDR4.5bn for FY15, its sales efficiency will increase above the 0.75x negative rating trigger.

More Commercial Property Sales: ASRI expects most of the rebound in presales in 2016 to stem from commercial property, but the company is also planning to re-launch residential clusters in its Pasar Kemis project, which had a healthy take up in 1H15. Furthermore, several of its residential and commercial high-rise projects are due to be completed in 2016, which should help the company to boost sales. However to reflect the increase of commercial property in the sales mix, Fitch has amended the ratios where it would consider negative rating action. In particular, the negative trigger on leverage (defined as net debt/property assets less customer advances) has been reduced to 50% from 60% previously.

Good Assets, Ample Landbank: The affirmation of ASRI's ratings reflects our view that the company's business risk profile has not weakened significantly. ASRI has ample low-cost land bank of around 2,000 hectares (ha) to meet its future sales, including 240ha of land in its established Alam Sutera township, which it plans to start selling towards end-2017.

Comfortable Debt Maturities: In 2015, ASRI repurchased all of its 2017 US dollar notes. The next significant debt maturity of USD225m (about IDR3trn) at today's exchange rates) only comes up for repayment in 2019, which provides the company with comfortable headroom space to effect a turnaround in reinvigorate its presales. However, based on our conservative estimates for 2016, we expect ASRI will need to draw down additional debt if it is to fund its planned land acquisitions of IDR800bn.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Presales will increase to IDR3.1tn in 2016, from around IDR2tn in 2015
- Presales / gross debt will recover to 0.4x in 2015, and 0.6x in 2016
- Leverage will remain around 45%-46% in 2016-2017
- ASRI will spend IDR800bn on land acquisitions in 2016

RATING SENSITIVITIES
Positive: Factors that may individually, or collectively, lead to the outlook being revised to Stable:
- A sustained increase in presales /gross debt to more than 0.75x, while maintaining leverage of less than 50% (2016 projection: 45%)

Negative: Factors that may individually, or collectively, lead to a negative rating action include:
- Presales/gross debt sustained below 0.75x beyond 2016
- A sustained increase in leverage more than 50%
- Higher spending into non-core businesses

FULL LIST OF RATING ACTIONS

PT Alam Sutera Realty Tbk
Long-Term Issuer Default Rating affirmed at 'B+'; Outlook revised to Negative from Stable
Senior unsecured rating affirmed at 'B+' and Recovery Rating of 'RR4'

Alam Synergy Pte Ltd
USD235m senior unsecured notes maturing in 2019 affirmed at 'B+' and Recovery Rating of 'RR4'
USD225m senior unsecured notes maturing in 2020 affirmed at 'B+' and Recovery Rating of 'RR4'.